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Unifi Sales Rise for Fifth Straight Quarter as Higher Raw Material Costs Hit Profits

Unifi Inc. knit together gains in revenue and income on strong product demand, but cost pressures cut into operating profits.

In a Nutshell: Unifi Inc., the Greensboro, N.C.-based yarn manufacturer, was able to achieve solid increases in net sales and income in the fourth quarter despite having to deal with ongoing pressure as a result of higher raw material costs. The company said it improved margins in the quarter from the previous three-month period by building in price adjustments. At the same time, there was increased demand from brands and retailers for its innovative premium value-added (PVA) offerings, including its Repreve line of polyester made from recycled plastic bottles.

Sales: Net sales for the fourth quarter ended June 24 increased 5.9% to $181.3 million, compared to $171.3 million for the fourth quarter of fiscal 2017. If the impact of foreign currency translation is excluded, net sales would have increased 7.1%, Unifi said.

Revenues from PVA products, including Repreve, grew 16 percent from the year-ago period and represented 45 percent of consolidated net sales. For the year, net sales increased 4.9% to $678.9 million thanks to increased global sales of PVA products.

Earnings: Net income in the quarter rose 11.3% to $10.8 million from $9.7 a year earlier. Unifi said net income was adversely impacted by comparatively higher operating expenses, but benefited from a significantly lower effective tax rate.

Operating income fell 40 percent in the fourth quarter to $9.3 million compared to $13 million in the prior-year period. The decline in operating income was primarily due to a reduction in gross profit. SG&A expenses in the quarter increased $1.2 million from the prior-year period as a result of investments in expanding international operations and domestic commercial capabilities.

Gross margin was 13.2% in the quarter compared to 16 percent for the 2017 period. Unifi attributed the decrease in gross margin to higher raw material costs and a less favorable sales mix, combined with a highly competitive domestic environment. Gross margin increased more than 300 basis points from the third quarter, pricing adjustments related to raw materials continued to take hold in the fourth quarter.

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For the 12 months, net income dipped 3.7% to $31.7 million from $32.9 million for fiscal 2017. Net income for fiscal 2018 included $7.2 million of tax benefits stemming from the reversal of a valuation allowance on certain historical net operating losses and the reversal of an uncertain tax position stemming from fiscal 2015, offset by higher operating expenses and foreign currency losses.

Gross margin for fiscal 2018 was 12.7% compared to 14.5% for fiscal 2017, with the decline coming from higher raw material costs and a challenging domestic environment. Operating income for the year, hit by a sustained rise in raw material costs, higher SG&A expenses and foreign currency losses, fell 34.2% to $28.8 million, down from $43.8 million in fiscal 2017.

CEO’s Take: Kevin Hall, chairman and CEO of Unifi, said: “Fiscal 2018 marked a challenging, but promising year, as the strategic investments that we made across the business materialized into accelerated top-line performance, which we believe will be sustainable into fiscal 2019. While higher raw material costs significantly pressured our margins and profitability in fiscal 2018, we began to see a positive impact in the fourth quarter from recent pricing adjustments. As we look to fiscal 2019, we plan for improvement in all our major performance metrics and continued progress against our strategic initiatives and long-term profitability.”

“With our core strategy focused on innovation and sustainability, we are excited about the opportunities that remain ahead of us. Building strategic partnerships and deploying our resources efficiently for commercial expansion remain critical to achieving our long-term goals.”